Why Don't Venture Capitalists Innovate?

January 6, 2009

Peter Hebert of PreHub, an online forum for private equity, asks a simple question this week: Why don't innovative VCs innovate?

For a group priding itself on identifying, nurturing and commercializing innovation, it’s ironic that the venture capital industry resides in the relative backcountry of financial innovation.

Considering all of modern finance’s experimentation and ingenuity (for better and worse), today’s basic VC model has remained untouched for over a quarter century. It’s as if 18th century traders swapping shares under a New York buttonwood tree agreed, “This is the future of finance.”

Why is it that the same investors obsessed with change and the next best thing haven’t applied their considerable talents to their own craft? For decades, this inefficiency was prized by a clubby VC industry as a competitive moat, keeping newcomers out and quietly maintaining a lucrative profession to fund vineyards and Gulfstream jets.

But I need not tell you that all isn’t well in venture capital. This isn’t another “VC model is broken” story. It is, however, an assertion that “We VCs need to reinvent the model.”

More on reinventing the VC model here.


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